February 1, 2016 / 3:01 PM / 5 years ago

Growing cost of grid, green fees blocks UK power price cut

LONDON (Reuters) - British households will not benefit from a fall in market electricity prices because their suppliers are facing rising costs elsewhere, such as green energy subsidies, which they say cancel out any wholesale price falls.

Power lines are seen at the Rio Tinto power station in Lynemouth, northern England in this July 2, 2009 file photo. REUTERS/Nigel Roddis/Files

Electricity and gas prices traded on the open market have fallen 20-35 percent in recent months as milder-than-normal weather has curbed demand and falling commodity prices have added even more downward pressure.

Two of Britain’s ‘Big Six’ energy suppliers, E.ON and SSE, have so far announced price cuts of around 5 percent to household gas tariffs, but reductions to electricity prices are notably absent.

“Many of the other costs that make up an electricity bill and that we don’t control have increased or may increase,” said a spokeswoman for E.ON UK, whose gas prices will fall 5.1 percent from Monday.

“These include electricity network costs - transmission and distribution - as well as environmental levies, such as the renewable obligation and FiTs (feed-in-tariffs).”

Cornwall Energy data showed the costs of government policies, which also include discounts for low-income households and payments for energy efficiency measures, on energy suppliers have risen to the highest level ever.

This means non-energy costs now make up as much as 60 percent of the average British electricity bill, up from 45 percent four years ago, according to Cornwall Energy data.

The main drivers here are the increasing costs to help finance building renewable energy plants, such as solar panels or wind farms.

Suppliers’ cost of the Renewable Obligation, the outgoing mechanism to distribute green energy subsidies, is 12.86 pounds per megawatt-hour, up from 10.57 pounds a year ago, Cornwall Energy said.

“These utilities are not selling electricity, they’re passing through renewable subsidies,” said Mark Freshney, utilities equity analyst at Credit Suisse.

The demand for renewable energy subsidies has been much higher than anticipated by the government, which has now imposed cuts to support for more mature technologies.

Transmission costs are expected to rise this year due to a Europe-wide change in the percentage of charges allocated to network operators. From April, Britain’s National Grid will be able to recover 83.3 percent of costs from suppliers, up from 76.8 per cent in 2015/16.

This means consumers will pay roughly 15 pounds a year more for their electricity bills, according to regulator Ofgem.

These cost pressures do not exist, or are lower, in the gas retail market, meaning suppliers can afford to pass on wholesale savings.

“You have more benefit as a consumer when the wholesale gas price goes down because it is a larger component of the final gas bill,” said Roland Vetter, head of research at energy advisory and investment firm CF Partners.

Data published last year by energy regulator Ofgem shows however that energy suppliers’ pre-tax profit margins in the electricity retail market were expected to average 9 percent between April 2015 and March 2016. This compares with 6 percent in 2014 and 1 percent in 2011.

The data was the latest available.

“Energy companies need to put their customers first and with wholesale costs coming down we expect savings to be passed on to them,” a spokeswoman for Britain’s energy ministry said.

Editing by Susan Thomas

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